FBI Uses Terror-Probe Tactics on Fraud

By

Devlin Barrett

Updated June 9, 2010 12:01 a.m. ET

Federal Bureau of Investigation officials in New York are increasingly employing tools and techniques used to hunt terrorists to take aim at a different kind of criminal: white-collar con artists and inside traders.

At a time when the public has grown suspicious of Wall Street and lost confidence in the government's ability to police it, investigators say they are expanding a number of methods, including the use of human sources, so-called tripwire programs, and internal intelligence reports, to try to get a better handle on crimes in the marketplace.

"We're trying to apply the principles of the national-security side so we can prevent something from becoming a $50 billion fraud by catching it early on," FBI Special Agent-in-Charge James Trainor said in an interview with The Wall Street Journal.

ENLARGE

James Trainor, FBI Special Agent-in-Charge.
Alfred Giancarli for The Wall Street Journal

Mr. Trainor, who is head of the New York field office's intelligence division, said he is trying to change what he says is the culture of silence on Wall Street along with the culture of investigative work in his office.

"Say there's somebody at a hedge fund who is considering investing. The folks who do this kind of research are very bright, and presumably many people did not invest in Bernard Madoff or somebody like Madoff. Instead of just not investing, I'd like them to also give me a call," he said.

Both the FBI and the Securities and Exchange Commission have faced criticism for not catching Mr. Madoff earlier in his decades of defrauding investors. As part of its own overhaul, the SEC launched an effort earlier this year to cultivate more informants and sources.

That sort of increased human intelligence-gathering is also at the root of the FBI's efforts.

Mr. Trainor, who oversees hundreds of intelligence analysts and agents, said he believed there was a "keep it quiet" culture among financial-sector workers who are afraid of being blackballed in the industry if they report their suspicions to authorities. He said that reluctance to talk must be worn down over time.

To get a better sense of Ponzi schemes and other crimes, the FBI has created a system of internal intelligence reports on ongoing investigations into financial crimes. The contents of the reports, called domain intelligence notes, can give early warning to agents not involved in the investigation about new frauds that have been uncovered.

Mr. Trainor said the bureau is also using tripwire programs aimed at encouraging citizens who might get the first signs of something nefarious to contact an investigator.

In terror cases, tripwires have been set up for large purchases of household chemicals that can be used to make explosives.

In the financial sector, tripwire programs focus on a range of areas where workers might see the first glimmers of a criminal conspiracy. For example, employees of trading firms would be encouraged to report questionable buying or selling or stock; those working at rating agencies would be asked to report suspcious lobbying to improve ratings.

Toby Vick, a lawyer who handles white-collar cases in Washington and around the country, said the FBI's new approach may help catch con artists, but he voiced doubts it would ensnare those involved in securities fraud. He said that finding a crooked investment banker within a corporation can often be a needle-in-a-haystack search, so using methods designed to map out terror networks may not work.

"It sends a chilling message to Wall Street, and I think practically speaking, it's a hard thing to do," said Mr. Vick. "All drug dealers are drug dealers, all terrorists are terrorists, but very few bond dealers are crooks."

Marvin Pickholz, a former SEC enforcement official now in private practice in New York, said investigators should maintain a healthy skepticism of the people supplying the FBI information, because they may be acting more out of self-interest than civic virtue.

"If the idea is to get more boots on the ground and more eyeball contact, that's wonderful, because that's where the system kind of went off the tracks in the sense that the SEC didn't understand what it was looking at," said Mr. Pickholz.

The veteran lawyer said he always offered up a particular strategy to investigators trying to catch more white-collar crooks: "Go down on the Street and go hang out in a bar, because people say things in a bar they would never admit elsewhere."

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